Information You Can Use - Safe Harbor 401(k) Deadline and CalSavers
For businesses owners who have not yet implemented a company-sponsored 401(k) plan, the deadline for adopting a Safe Harbor 401(k) for calendar year 2019 is approaching on October 1st.
What is a Safe Harbor 401(k) Plan?
A Safe Harbor plan works like a traditional 401(K) plan in that owners and employees alike can defer from their compensation up to $19,000 ($25,000 for those 50 and over) per year. Employees can choose pre-tax or after-tax Roth contributions (with no income limitations) and assets in the plan are typically protected from creditors. In a traditional 401(k) however, owners and highly compensated employees may be limited in their deferrals based on the overall participation of the entire eligible group.
The Safe Harbor provision requires the company to make a minimum contribution to eligible participants, but in doing so allows owners and highly compensated employees to max out their deferrals regardless of overall group participation in the plan.
The two commonly used Safe Harbor company contribution options:
- 3% Non-Elective Safe Harbor - Provide a 3% profit sharing contribution to all eligible, non-highly compensated employees (may also include highly compensated). This 3% may do "double duty" and be counted as an offset for new comparability profit-sharing plans.
- 4% Matching Safe Harbor - Offer non-highly compensated employees a $1 for $1 match up to 4% of income (may increase match to 6% of pay and may include highly compensated).
Safe Harbor contributions are tax-deductible to the company and 100% vested immediately to the participants. Owners have found this trade-off extremely worthwhile. By electing a Safe Harbor, they are allowed the maximum deferral, they too receive a company contribution, and they reward their employees while helping them save for their retirement.
How Can I Put More Away on a Pre-Tax Basis?
For owners with significant potential profits and tax liabilities, a profit-sharing plan can be paired with a 401(k) plan. There are several methods for calculating profit sharing among the pool of eligible employees, but contributions can oftentimes be skewed to owners and select employees. Company profit-sharing contributions are tax-deductible and are not required annually. Adding this option to a plan simply allows for discretionary contributions in high profit/high tax years.
What is a Defined Benefit Pension Plan?
For highly profitable companies we have seen great success in implementing a third retirement plan component, a defined benefit pension plan. Defined benefit pension plans often allow for significant pre-tax contributions, sometimes hundreds of thousands of dollars per year. They work very well in businesses with:
- Few or no employees other than the owners
- Union employees
- Medical groups
- Older owners with younger employees
- Stable and predictable cash flows and profits
What is CalSavers and Why it Matters to Business Owners?
If a company declines to establish an employer-sponsored retirement plan, the California government has decided that they soon will establish a plan for you. Senate Bill 1234 was signed into law by Jerry Brown on September 29th, 2016 and requires California employers to offer a retirement plan or join the new government-sponsored plan, CalSavers.
Beginning July 2019 employers can voluntarily start participating in CalSavers. However, the mandated deadlines are as follows:
- June 30, 2020 Businesses with 100+ employees
- June 30, 2021 Businesses with 50+ employees
- June 30, 2022 Businesses with 5+ employees
Employers enrolling in CalSavers will have no options to customize their plan, company contributions are not allowed, and currently the only option for employees is to fund a Roth IRA. Normal Roth IRA contribution limits apply thus employers or key employees with Modified Adjusted Gross Income of $137,000 for singles and $203,000 for married filing jointly won’t be able to contribute.
We love the idea of greatly expanding retirement plans to those that otherwise would not have access to a convenient method for deferring income toward retirement. CalSavers will fill the void as a very basic retirement plan alternative to small businesses. For more established businesses with significant profits and tax liabilities, a fully customizable plan will likely be more appropriate.
If you are an owner of a company that can benefit from a Safe Harbor 401(k), Profit Sharing, and/or Defined Benefit Pension Plan, feel free to click here to schedule a 30-minute introductory call and we’ll help determine a strategy that’s right for you.
Further reading: https://www.calsavers.com/